FX Daily: Omicron dovishness | Article

The rebound in equities yesterday was relatively contained, and Asian equities (as well as Western stock futures) are back in the red this morning. This is clearly an indication that markets are awaiting some solid confirmation that the current vaccines offer enough protection against the Omicron variant before jumping back on risk-on trades. For now, the US administration is not running on the assumption that new vaccine formulas will be needed and is simply planning to roll out booster doses faster (like in most other developed countries).

In FX, low yielders are finding fresh support this morning, and a contraction in oil prices after yesterday’s tentative rebound is back to putting pressure on commodity currencies. In the pro-cyclical space, SEK emerged as a major outperformer yesterday, likely benefitting from a sizeable short-squeezing, as some market sentiment stabilisation allowed a delayed positive impact from last week’s hawkish Riksbank meeting.

Another factor that seems to be offering support to the likes of the low-yielding JPY, EUR and CHF against both pro-cyclical currencies and the dollar, is the process of repricing of rate expectations in light of the potential danger caused by the new variant. After all, the three low yielders are inherently those with the smallest room for a dovish repricing when it comes to 2022 rate expectations.

Tonight’s Senate Testimony by Fed Chair Powell will be the focus of much attention, as prepared remarks showed that he will flag significant downside risks stemming from the Omicron variant to both employment and economic activity. Markets have now pushed back the first rate hike by the Fed, to September 2022.

With this in mind, a recovery in the dollar remains strictly tied to some positive news on the vaccine coverage against the omicron variant. The greenback should continue to stand in the middle between the group of low-yielders and pro-cyclical currencies – which like the dollar have the largest room for dovish repricing of rate expectations. Things tend to change rapidly as virus-related news hit the market, but for now, indications of markets plunging into risk-off suggest we could still see USD capped and commodity currencies staying offered on oil underperformance.